This research is important for several reasons. First, the authors provide insight into how amonitoring mechanism, such as the staff of the DCF, adds to the oversight of the financialreporting process. The findings illuminate the importance of understanding the conflict betweenboards and CEOs by suggesting that a strong CEO's influence over a board may adversely affectthe effectiveness of board oversight. The authors provide evidence that the DCF may targetcompanies with strong CEOs and weak board monitoring for more intensive review. Second, theresults imply that the discovery of the need to restate is different for DCF-instigatedrestatements. DCF-prompted restatements lead companies to re-evaluate their governancestructure.

Section 408 requires the Securities and Exchange Commission (SEC) to review the filings of allSEC registrants every three years.The SEC Division of Corporation Finance (and not theDivision of Enforcement) is the part of the SEC charged with carrying most of the burden of theSection 408 monitoring. This study investigates this SEC monitoring role and differs from pastSEC research by focusing on the SEC Division of Corporation Finance (DCF) rather than theDivision of Enforcement and specifically on DCF's "review and comment" monitoring role.

The authors argue that the DCF appears to realize powerful CEOs have more opportunity todeceive due to their greater board control and, therefore, they are viewed as experiencing lessmonitoring by other sources. In other words, the DCF appears to be naturally drawn to the firmswhere strong CEOs dominate the financial reporting process and firm-level monitoring byauditors and boards may be relatively lax.

Design/Method/ Approach:

The sample of 980 observations includes restatements from 2000 through 2007 obtained fromGAO reports and Audit Analytics. The authors restrict the companies to those found in a Russellindex. 209 observations were DCF prompted and 771 observations were other monitor prompted.Of the 980 observations, 825 were used in the analysis of the changes in CEO power as aresponse to restatement.

Findings:

The authors find evidence that a powerful CEO may be able to bargain for less boardscrutiny through fewer board meetings.

In the year prior to the discovery of the need to restate, firms with restatements promptedby the DCF have stronger CEO power and exhibit some evidence of weaker boardmonitoring.

Compared to firms with restatements prompted by other monitors, firms withrestatements prompted by the DCF tend to have strong CEOs in the period prior to thediscovery of restatements.

The authors find that companies with restatements prompted by DCF (versus othermonitors) are more likely to terminate strong CEOs following the discovery ofrestatements.